Wasn't Simon pretty conservative? And didn't he get 42% or so of the vote in California? If you've got that high a percentage willing to vote for a conservative in a two man race, why couldn't the right conservative get a plurality in a three-man race?
Let's just change it up a bit. Suppose Arnold was more conservative on abortion, gun control, etc. I'm guessing that would have knocked McClintock out, and Arnold would have Simon's base plus whatever else his name recognition would attract. Add in some middle of the roader to take more votes from the lefty Busta, and a conservative Schwartzenegger might win.
The problem in this race is that McC just isn't the type of guy who inspires confidence in party as a whole. And since he can't nail down the Republican vote, and has little chance of anything in the middle, he's almost a sure loser. If a conservative is going to win, he must have the lock-step support of the party. At an absolute minimum. Add in the dynamics of a three-way race, and such a candidate has a chance. Unfortunately, McC isn't that guy, and the splintering occasioned by the recall is unlikely to be repeated.
So I think a conservative could have won this race. It's just that this conservative can't win at this point.